Possible conflicts of interest complicate self-regulation.

The exchanges and other self-regulatory organizations also struggle to maintain a public perception of fairness. After all, some large, profitable customers use High-Frequency Trading strategies, collocated technology platforms and Flash Trading techniques to gain a technological advantage over the competition.

In many cases, these customers operate in gray areas of the law where there is no clear path to enforcement. But even in cases where there is a clear violation of the rules or principles of ethical conduct, the exchanges have to think twice about imposing punishment, because they run the risk of losing these highly profitable customers to other trading venues.

When you consider all of these issues and trends, it’s easy to understand why it’s so difficult for regulators, exchanges and other self-regulating organizations to maintain fairness and transparency in price discovery and trading.

Nevertheless, it is essential to find a practical way to resolve these problems to maintain the credibility of regulatory organizations and the markets themselves. Otherwise, more and more investors will gradually discover that they are
operating at a decided disadvantage to a small number of ultra-sophisticated traders. And that will inevitably lead to a heightened demand for new legislation and regulation designed to ensure a level playing field.

In addition, many investors may decide to terminate their relationships with exchanges that do not enforce fair trading policies when offered a choice of exchanges that do enforce these policies, and seek out more equitable venues.

This looming “flight to fairness” could have a wide-ranging impact on markets, exchanges, regulators and the capital formation process.

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